Egypt economic optimism high as transition government reigns

Last updated: Friday, July 05, 2013 11:26 PM

CAIRO – The ouster of president Mohamed Morsi may give Egypt's economy its best chance since the 2011 revolution to escape a downward spiral of currency weakness, capital flight and crumbling state finances.

The departure of Morsi, who was widely blamed for the condition of the economy, will not provide any quick or easy fixes to problems such as dangerously low foreign reserves, a ballooning budget deficit and high unemployment.

But many businessmen and economists hope for the appointment of a more technocratic administration that would address these problems methodically, while luring back some of the investors and money which have fled the country.

"I think Egypt will start taking very strong steps to strengthen the economy...I think a lot of investment will come in," said Medhat Khalil, chairman of Raya Holding, an Egyptian information technology conglomerate.

Khalil predicted Egypt would emerge from its economic crisis in six months at most - a prediction which most foreign economists consider far too optimistic. But such optimism added about $3.2 billion to the stock market's value on Thursday as the main share index jumped 7.3 percent.

Particularly strong were shares in companies perceived to have suffered under Morsi's administration for political reasons, such as Ezz Steel, whose former owner was a leading official in the party of former president Hosni Mubarak.

Egyptian bond prices rose sharply and the black market exchange rate of the Egyptian pound narrowed its discount to the official rate - a sign that traders thought more funds might flow into the country.

Akram Farag, founder of Oxygen Consulting, a Cairo firm which advises on digital content, said he had been thinking about leaving Egypt but now intended to stay. Other businessmen were making the same decision, he said.
"In the short term and the long term I see what happened in Egypt last night will have a positive effect on the economy and investment."

Much of the economic turmoil under Morsi was the result of indecisive and inexpert administration. After the 2011 revolution, successive governments had trouble attracting experienced technocrats, who feared being tainted by an unpopular ruling military council or by the Islamist ideology of the Brotherhood.

The outpouring of public anger with the Brotherhood in the past few weeks has largely erased the stigma attached to working in a government backed by the military, businessmen say.

"None of this is on the table now, so I believe that anybody who is asked to join the cabinet won't hesitate," said Karim Helal, chairman of ADI Capital, the Egyptian investment banking arm of Abu Dhabi Islamic Bank.
Mohamed ElBaradei, who headed the United Nations nuclear agency, is a favourite to be named as head of a transitional government that will prepare for elections.

The acclaim which the army won from much of the population for its smooth overthrow of Morsi may give the transitional government a window of opportunity to push painful economic reforms that previous administrations shied away from adopting.

Morsi's government had been running out of cash, partly because of expensive subsidies for gasoline and other fuels which eat up over a fifth of state spending. The cash squeeze led to rolling electricity blackouts and queues of cars at filling stations.

If it can improve the energy supply situation, the new administration may be able to justify to the public subsidy cuts that would partially repair the state budget.

"This might make it easier to push energy subsidy reform: if you explain to the public that they may have to pay more, but that fuel will be available at that price," said Simon Kitchen, a strategist with local investment bank EFG Hermes.

Whatever the policies of the new administration, Egypt is likely to remain dangerously dependent on foreign aid to finance its external deficit for years.

Raza Agha, economist at financial firm VTB Capital in London, estimated Egypt would need a $19.5 billion of external financing in the year through June 2014, to cover maturing debts and a $5.4 billion deficit in trade of goods and services.

That estimate assumes no more capital flight, which could be triggered if, for example, elements of the Muslim Brotherhood turn to violence in response to their ouster.

"A currency crisis can make things much worse than they already are. Egypt imports much of its basic food needs. Food price inflation would go up, which could lead to more popular unrest in an already highly impoverished and polarized country," investment bank ING wrote in a research note.
Many investors hope the new government will agree on a $4.8 billion emergency loan with the International Monetary Fund, which Morsi's government initialled last November but never ratified. ElBaradei has pressed for Egypt to sign the deal.

Hopes for an early IMF agreement may be misplaced, however. To avoid seeming to endorse a military coup, and to ensure that tough economic reforms in the loan deal have broad political support in Egypt, the IMF may wait to negotiate with an elected government - and it could be months before polls are held.

Egypt may be able to count on more aid from two other rich Gulf states.Egypt "is in a much better position now to receive aid from Saudi Arabia and the UAE," said Citigroup regional economist Farouk Soussa. "Both Saudi Arabia and the UAE have promised significant financial aid to Egypt. It is more likely that Egypt will receive it now."

Meanwhile, Fitch Ratings has downgraded Egypt by a notch after the military ousted the government of President Mohammed Morsi, saying political stability is at risk.

The Egyptian Army earlier this week seized on antigovernment protests to overthrow the elected government of Morsi, deepening international concern for the stability and political future of the largest country in the Arab world.

Fitch said the latest crisis carries risks to the economy and the country’s creditworthiness and said the political environment may make it harder to implement needed fiscal reforms.

The ratings firm said heightened uncertainty and inflamed tensions are likely to set back the country’s economic recovery and could worsen already deteriorated fiscal outcomes.

Fitch believes growth in Egypt is unlikely to exceed 3 percent in fiscal 2014 and notes that the budget deficit for fiscal 2013 was 13.5 percent of gross domestic product – the highest of all Fitch-rated sovereigns.

Tourism has suffered a heavy blow in Egypt amid the ongoing political crisis and the recent military coup ousting Morsi. The sector has long been weighed down by the effects of the 2011 uprising and recent developments may dash hopes of reaching the record 14 million visitors seen in 2010.
Signs of recovery have been seen in the sector this year and 4.9 million people visited the country from January to May, Egyptian ministry figures report. A 17.3 percent reduction was seen in the first quarter, however, compared with the same period in 2012, when the number of arrivals was close to 12 million. On the basis of official figures, at the end of April, Red Sea hotel reservations for the summer had surpassed 80 percent, while in Cairo they have risen to 45 percent. – Agencies